Why banning letting agent fees won't push up rents

There is short supply and high demand for homes to rent. The balance between these forms a price that a tenant is willing to pay a landlord. So far not controversial.

However, that is not how the relationship between tenant and agent is characterised. At the time of signing a contract, the agent is the gatekeeper to a single home with any number of keen tenants. The agent is not an actor in the market for homes to rent but a creator of micro-monopolies for single homes.

This is the reason why letting agent behaviour, hidden fees, discrimination, poor customer service etc. is so rife, and indeed why these behaviours are rarer in areas where supply and demand for homes is in better balance.

The relationship between agent and landlord on the other hand is vastly different. The landlord holds the home and agents are many in number, requiring no great skill and no qualifications at all. The agents have to compete with each other to win a monopoly over the tenancy of a landlord’s property.

So agents won't be able to hike up fees to landlords because the landlord will just go to a cheaper agent. This will lower agent fees until they are more reflective of their cost base, at which time they will have to start competing on other grounds, such as professionalism and customer service.

By banning letting agent fees to tenants, less money will go to agents that's true. But landlords should expect lower costs and a better service as the effects play out. And more professional agents will be of benefit to tenants beyond the absence of exploitative fees. In fact, if this were implemented quickly and the market effects on agents flowed through quickly, that could radically undermine the case for mandatory licensing of letting agents.

This is such a classic market solution to a social problem that I'm surprised it's not Conservative policy.

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Christine, The tenant has no power in the relationship with landlords or agents. If you really think that there is no scope for statutory consumer protection for over 9 million tenants, then I don’t think we have any overlap in our points of view.

Your agency could well be the best in the country, but you know that there are many agents with lower standards. If your industry behaved better, it would not be facing the prospect of statutory intervention.

Your prescription that people should just move to cheaper places than London would result in damaging London’s global competitiveness.

If you read the article above again, you will see that banning letting fees to tenants will have a downward pressure on fees overall. But even if that didn’t happen and the fee was passed on in rents, it would be completely transparent, giving a little more power to tenants.

But if it does get pushed into rents, you won’t lose any money. So why are you bothered?

No, I don’t want to start a letting agency

Alex

Christine Thomas commented
2014-05-11 17:29:47 +0100

Elizabeth Bailey. I discussed why rents would rise if letting agents were banned from charging tenants fees and Mr. Hilton has not disagreed with that point. He could have opened up a letting agency which did not charge tenants so that you had more choice and chance of avoiding agency fees. Would you have disagreed with that? If not, please encourage him to open up such an agency.

Do you disagree with the part that you should know what you are committing to in a contract before you enter into it? It would be wise before entering into any contract to know what your commitments and benefits arising out of the contract are. What makes a tenancy/agency contract any different? This would ensure that you knew what fees if any you were required to pay before you entered into the tenancy, on renewal of your tenancy or any other fees for that matter. Whilst you may still be disgusted that you have had to knowingly pay 1p in agents fees, you would not have been surprised at paying it. What is wrong with consumer education protecting the consumer?

We compete with letting agents who charge a lot more than us in Application Fees. Our fee is in the tens of pounds while theirs are in the hundreds. If the potential tenant proves unsatisfactory for one landlord, he may prove satisfactory to another landlord. The fee is used to find out about the tenant and is not charged again if he then applies for another property within a reasonable time. It was not so long ago we did not charge any application fee to tenants but introduced it for more reasons than making a profit. We do not charge tenants renewal fees. Our tenancies automatically run into statutory periodic tenancies. We charge the landlord if there are necessary changes to the tenancy agreement. Other agencies charge hundreds of pounds. Where we believed other agents have unfairly charged fees to our incoming tenants, we have pointed them in the direction to get legal help but they often cannot be bothered. This service is what we believe differentiates us from the other letting agencies and not just our fee structure.

Nobody I know has to live and work in any particular part of the UK or EU for that matter. They make their own choice to suit their own respective circumstances but it is still a choice. You chose to rent in London and pay the fees. You could live further out and commute into work. You could choose another profession, another employer or start your own business, another place to live or work. You choose to have no stress of moving and pay the renewal fee. You have so much choice, why are you wanting to restrict someone else’s choice?

“Many of us cant afford to buy and we therefore have to rent. We have no choice. We have to live and we therefore have to pay these fees.”

1.You have chosen to live and work in London. A highly remunerated, high cost of living, high property value area of the world.
2. You could choose to find better ways to win more remuneration or stay at your level. You are competing with the other residents of London for resources (remuneration, housing, food, entertainment, etc. You are successful enough to get sufficient remuneration to rent in London but not to buy in London.
3. You could choose to reduce your consumption and save with a view to relocating to an area where you could afford to buy and live.
I have shown you how you can choose not to pay those fees.

Elizabeth Bailey commented
2014-05-10 13:13:40 +0100

Christine I totally disagree with you. I rent in London where its so difficult to find a property that if you find one you generally have to pay the fees. And once you are in a property you get hit with renewal fees. The stress of moving is so great that you obviously have no choice. Its absolutely disgusting and should be stopped. Many of us cant afford to buy and we therefore have to rent. We have no choice. We have to live and we therefore have to pay these fees.

Alexander Hilton commented
2014-05-05 21:32:27 +0100

Christine. I think within there you agreed that there are some bad letting agents and that that there are negative effects of the market on tenants, though your analysis is that tenants should resolve these matters. Can we safely agree to disagree on your analysis?

Christine Thomas commented
2014-05-05 20:26:38 +0100

I have been working as a letting and managing agent and do not keep company with letting agents who “unfairly exploit” tenants. “Exploit” has more than one meaning and I am led to understand that you mean abuse. I do not believe there is a culture of tenant abuse amongst agents. Good agents want to gain and keep good tenants and landlords.

I would not say that there are no bad agents out there. I am sure that if you go looking for bad agents you will find them. A more positive act would be for you to look for good agents if you are looking to rent. If you felt strongly enough you could promote or publicise the good agents to potential tenants and landlords and/or you could provide guidance to potential tenants as to which agents to avoid. In todays litigious society, you could be opening yourself up to litigation from agents who felt you have libelled or slandered them, and from potential tenants who may seek damages from you because they felt you provided them with advice and they suffered financially or otherwise from your advice.

In an open meeting at the Cardiff Landlord’s Forum, the Council stated that there are bad landlords about but there are more bad tenants than bad landlords. They wanted to encourage good landlords and change bad landlords into good landlords. They have also said openly there is little that they can do about bad tenants, and in my experience they have little motivation to assist the landlord or agent in dealing with the bad tenant.

In answer to your question on the market power between tenants, agents and landlords:

1. The potential tenant should educate himself as to the questions to ask when looking for a property to rent through an agent for the landlord. They should get the full picture (fees etc.) before entering into the process/signing a contract. After that, if he/she then feels they have been wronged, there are legal processes for redress.

2. The potential tenant holds the money that the landlord and agent want for providing a service. You say that the agent is the gatekeeper to the MICRO-monopoly of the landlord’s property. The tenant has the power to choose which micro-monopoly he/she engages with. In a healthy market one agent/landlord/property or micro-monopoly would be insignificant. It is not always a monopoly as landlords can/do use multiple agencies to advertise their properties for rent or even do it themselves.

3. You state that “these behaviours are rarer in areas where supply and demand for homes is in better balance”. The tenant can choose to rent in an area where the supply and demand are in better balance or even where there is oversupply of homes for rent to demand. The tenant can choose where, the landlords property is stuck in the dirt.

4. Just because there is a law prohibiting something does not mean that it is stopped entirely. Just look at cannabis smoking or other “controlled drug” consumption, speed limits on roads.

5. Landlords require a certain return on their investment. By reducing the amount that the tenant pays to the agent, the agent is pressured to charge the landlord more as that is now the only source of income for him. They may compete with other intangible benefits but the service still as to be paid for. If it is passed completely on to the landlord then to maintain the level of return rents must go up or the landlord will sell up (probably to someone other that that renter) and invest elsewhere. (Ignoring price elasticity of supply and demand.)

What I would say to you is that there are currently no barriers to enter the business of letting and property management. By your account running a letting agency requires no great skill or qualifications, you should easily outcompete all the letting agents out there who charge potential tenants a fee. You would then be a letting agent PARAGON, and all letting agents would be forced to follow your lead thereby eliminating agency fees to potential tenants. LEAD BY YOUROWNEXAMPLE. In the process you would have saved countless potential tenants from paying agency fees, and built yourself a good business. Surely a win for tenants and a win for yourself.

Alexander Hilton commented
2014-05-04 23:38:37 +0100

Christine, I appreciate the consideration you have put into this response and I’m sure you have been among the best of landlords, tenants and agents. But are you suggesting there is no culture of exploiting tenants among agents? Or that the market power between tenants, agents and landlords is not how I describe it?

Christine Thomas commented
2014-05-04 14:14:05 +0100

Potential tenants are free to choose a property from the market at the time. In a healthy market, they would include properties marketed by owners themselves, properties marketed exclusively by one agent, and properties marketed by more than one agent. Property managers and letting agents have to compete with other agents for the attention/custom of tenants and landlords. Running a letting/management agency is not riding a gravy train.

Landlord/tenant law is complex and changing. Together with all the other legislation that a business has to follow to operate successfully is not simple. An agent/lndlord would be very unwise not to undertake training to acquire knowledge and skills to run his business and get a good source of legal advice/support.

Tenants frequently turn to the council for free support in disputes with their landlord. Landlords/agents get little to no support from Councils in eradicating irresponsible and anti- social behaviour by their tenants.

How much training and education of potential tenants takes place? Potential tenants are not required to obtain a licence or qualification before they are allowed to take up a tenancy. Frequently with rights come obligations. How many tenants understand and shoulder their responsibilities well? There are good tenants and there are bad ones. A good agent and landlord works to keep a good tenant. Should we not call for tenant education so that they can: form better landlord/relationships? make educated decisions between the agents who charge a letting fee and those who do not?

Would banning letting agent fees would push up rents? We believe it would as the advertising and letting of a property has a cost. How it is paid for whether through a letting agent fee to a prospective tenant or by a fee to the landlord or by a combination of both depends on the situation. In the end the consumers pay. The ultimate consumers of the rental industry are the tenants and they would bear the cost.

For your information, I have been a tenant, homeowner, landlord and letting/property manager.